Because Mainstream Personal Finance Advice Is Not What It Should Be

As any reader of this blog knows, I enjoy nothing more than tweaking the nose of personal finance conventional wisdom. Well, joy of joys, yesterday’s New York Times had an article, in the science section no less, that spits in conventional wisdom’s face, knees it in the groin and then kicks it as it rolls on the ground.

The piece discussed the work of Ran Kivetz and Anat Keinan, two professors of marketing from Columbia and Harvard Business Schools respectively. (Marketing professor is, incidentally, the same line of work as the authors of The Millionaire Next Door.) They have discovered a new malady to avoid: saver’s remorse. It’s just what it sounds like: that sad feeling you get with money in your pocket that you could have spent in some enjoyable way but, in a moment of weakness, chose to save.

This is just so awesome.

The sober professors don’t call it saver’s remorse. I think John Tierney, The Times’ science guy, came up with that. They use the term hyperopia, literally excessive farsightedness. Sufferers of hyperopia “deprive themselves of indulgence and instead overly focus on acquiring and consuming utilitarian necessities, acting responsibly, and doing ‘the right thing.’” (K&K 2006 p.274)

Saver’s remorse (hyperopia) is the logical counterpart to buyer’s remorse (myopia). Just as you might grow to regret that impulse purchase over time, the research shows that a person can grow to regret not grabbing immediate gratification. Kivetz and Keinan asked college students right after winter vacation if they wished that they had spent more time studying or partying over the break. Studying won. Then they asked them the same question about the break the year before, and regrets about not studying more and not partying more were tied. And when the researchers asked a group of alums back on campus for their 40th reunion, regrets about not partying enough won in a landslide.

Like most good social science research, once you read this it suddenly seems awfully obvious. I’m only about halfway to my 40th, but in hindsight I really wish I had adjusted the beer/grades ratio in college more in favor of beer. And there’s the old adage, with some truth to it, that nobody on their deathbed ever wished they had spent more time at the office.

It turns out that at some level we know we can be irrational in a hyperopia way and so sometimes act irrationally to counteract it. In a paper that Kivetz wrote with Itamar Simonson of Stanford, test subjects were asked to choose between two possible raffle prizes, for example $100 cash or a romantic dinner for two costing $90. Even though a winner of the money could just buy the dinner and pocket $10, many (about 24%) chose the dinner option anyway. Why? Because they knew that if they got the money they would just save it and then regret not going to the restaurant later on.

This research makes me grin from ear to ear. (Seriously, I think I may have pulled a muscle. I guess I should have warmed up first. I’m a little out of practice.) Just about all personal finance advice, from Suze Orman and Dave Ramsey down to the most obscure frugality blog, takes as a given that spending myopia, the tendency to buy too much stuff for immediate enjoyment rather than save, is inherent to the human condition. Not so.

Don’t get me wrong, I’m not saying that myopia isn’t common, or even that it isn’t more common than hyperopia. I bet somewhere there is a study where way more than 24% of people chose, for example, a savings bond worth $90 over $100 in cash as a possible raffle prize. David Bach has sold millions of books that basically explain how to make exactly that sort of irrational choice, so there must be a lot of myopics out there.

But they are not everybody, and possibly not even the majority. (There must exist a third group, the 20/20s, who don’t systematically regret either spending or saving later on.) Myopics are much higher profile than hyperopics, and are much more likely to seek help, because spending myopia has the obvious result of financial distress. Spending hyperopia, on the other hand, results only in wistful old people.

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I feel that about college even now when I’m in grad school. I’m realizing just how pointless it all was =D

Looking back isn’t w/e situation you have how you feel?

You have lots of savings etc…. “I wish I bought that thing when i could enjoy it”
You have lotsa vacations … “I wish I saved more =/”

I think college is biased, students need to realize you need decent grades, but one or two bad ones won’t hurt heh. I think it’s bad, as the capping degree keeps going up. Back when all you needed was a BS –> try somewhat hard in high school get into ugrad and sorta care abt grades…
Now it’s shifted to phD’s. BLAH.

The 20/20 thing, i think is something that people tend to learn on their own if they do so at all. I can’t say i’m fully 20/20, but i’d to think i’m pretty close. Most of my life i’d been on the hyperopia side, but since graduating college years ago i’ve experience a few of saver remorse moments that made me decide that i should strike a balance between saving and spending. I reason if i don’t do some of the things i can now, because i’m young even to do them, or enjoy them, then i will have less of a chance to fully do them later. After all it’s not just whether you have enough money to experience life, but also if you have the time, energy, and health to do so.

I often reminded my sons growing up that the pain of discipline is far less than the pain of regret. The concept missing from this discussion is what options may be foreclosed by myopia. Drinking more beer in college at the expense of studying grades may be a fine choice if you are majoring in business and plan on selling insurance for a living. On the other hand, if your career goal involves a field where you actually need to acquire and retain knowledge (e.g., engineering, medicine) those myopic beer grades won’t get you very far. Whether you are deciding to save or study, preserving your future options is always a good strategy.

I agree with SJ, and I’m just about done with grad school as well. I think success is a confounding factor in these statistics. For example if you set a goal to have a comfortable retirement and you reach that goal with excess you would obviously say “Well I guess I could have partied more” and if you don’t make the goal you probably say “I should have partied less.” What I want to know is what percentage of people, at their 40th reunion, who were not successful in planning for their future/retirement, still think they should have partied more?

Zac: Oh I just started grad school (lol!)
I can only speak from the point of view of engineering… but for most people you don’t need THAT much studying to have a cursory understanding of the engr. material. (Or looking back it feels that way lol!)
Of course, to succeed and get GREAT grades takes up a lot of time.

In truth, if you are going into engr. you can get by w/ just a basic understand and learn whatever else is needed on the job (it sure felt this way at my internships)

The thing most college students aren’t taught is UNLESS you want to go to a top-tier grad school, you don’t need great grades, a solid 3.3-3.5 is good enough. And even if you want to go to a top-tier grad school the MOST important thing is your research.

And while I agree the grades open up more option; I think it’s more important to enjoy college more. It’s 4 years of your life in which you have freedom AND limited responsibility. Don’t go crazy duh, but grades are eh.

If I could go back and do it again =| But then again, part of this reflects some internal shifting of goals.

In terms of saving, my friend is going crazy trying to save; I told him a while ago that at our age it’s also the chance to go (not crazy) but to enjoy life lots!

And when the researchers asked a group of alums back on campus for their 40th reunion, regrets about not partying enough won in a landslide.

Hardly shocking, as Zac pointed out before me. All of those people graduated unlike the people who were still college students making up their earlier groups with the same question. Naturally, the graduates are heavier on the hyperopic than the myopic compared to the current college students group.

Similarly, if you have in fact been “20/20″ and no major disasters have befallen you, in your old age you will end up having too much money. It was prudent to save more than you “should” in case a disaster had happened, but since it didn’t, you now appear to have been hyperopic. Since most people don’t have a major disaster occur, more “20/20″ people will appear to be hyperopic than myopic late in life. (Some, who do have a major disaster, will still regret having spent too much, of course, and being unable to cope with their emergency, even though they were striking the “right” balance.)

So, what’s your risk tolerance? Since we all agree that the adverse consequences of myopia are greater than the adverse consequences of hyperopia.

Personally, I’m only 7 years out of college, and I can look back to some very crucial interviews and professional exams (engineering-type related) where I passed and advanced in my career by what I think might have been the skin of my teeth. I think that if I had studied much less then I wouldn’t be where I am today. There are certainly parallels with financial decisions, too.

Of course it’s no surprise that if you ask a group of celebratory 62 year olds if they should have studied or partied more they’ll pick the latter; for all the reasons mentioned above.

Each month I pay for car insurance, homeowners’ insurance, long term disability insurance, and for seven figures worth of term life insurance.

One month from now, if I haven’t totaled my cars, my house hasn’t burned down, I’m not crippled, and I’m still alive; then yes, in one sense I suppose should regret having spent this money on insurance. In the mean time, I’ll err on the side of caution.

Tilde Underscore Carrot: Honestly, when I think of a pair of marketing professors, Millionaire Next Door pops into my head automatically. I don’t think that was a jab, just an aside. I do think it has bad advice, BTW, and come to think of it does conflict with what these professors are saying.

Andrew Stevens: Without the ignorance of social scientists, we’d be in a much better place, no doubt.

I agree that the 40 year reunion thing has some issues from a scientific point of view, as the alums who show up for the 40th are no doubt skewed to the successful and sociable. But it’s such a good story I just couldn’t resist. The differing feelings of the students about the recent winter break and the previous one is much better data. Also, I would encourage readers to click the links to the actual papers, which contain many more experiments that come to similar conclusions.

What about those smug people who seem to get huge enjoyment from depriving themselves? Well-off people in LA (just LA, right?) who go dumpster diving the way my sister goes “garage saleing” — like some sort of sport.

Are they “suffering” from hyperopia, or enjoying it? Can we get Ed Begley to weigh in on this one?

On the 40th reunion: it’s human nature to remember the good things and to let the bad fade away. Of course we reminisce about parties and whatnot. This ability to let certain memories fade away also explains my multiple marriages.

I agree that the 40 year reunion thing has some issues from a scientific point of view, as the alums who show up for the 40th are no doubt skewed to the successful and sociable. But it’s such a good story I just couldn’t resist. The differing feelings of the students about the recent winter break and the previous one is much better data. Also, I would encourage readers to click the links to the actual papers, which contain many more experiments that come to similar conclusions.

No, the year later thing has the same problem. Over the course of a year, some percentage of people will drop out. We are only polling the survivors. I could use a similar methodology to prove nobody died in World War II.

More importantly, there is the whole problem of people making decisions in anticipation of an uncertain future and then asking them to judge those decisions with the perspective of a certain past. Ryan pointed out insurance. If you buy term insurance to protect your dependents, you are hoping that it will be a waste of money, but preparing in case it isn’t.

Perhaps the article should have carried the headline, “Marketing Experts Think You Should Spend More Money Shock.”

I’m not saying that there aren’t people who live too frugally. Misers exist (Warren Buffett is almost certainly one of them, Andrew Carnegie was another), but they’re a pretty small minority compared to spendthrifts.

Disclaimer

All advice in this blog is guaranteed to be worth at least what you paid for it, or double your money back. All persons dealing with matters of personal finance are advised to gather information from blogs, books, radio and TV, consult with professionals, discuss the matter with anybody who will listen, and then make their own decision. Because it’s their money.